Smackey Dog Foods free essay sample

Introduction Smackey Dog Foods, Inc. is a small, private company which specializes in manufacturing and selling natural dog foods. Their new boutique division, Best Boy Gourmet has grown significantly due to recent product demand. The company started small and is operated by sisters Sarah, Kim, and Jillian. Sarah serves as the President and General Manager. Kim is the Production Operation Manager overseeing the inventory, production, and shipment of the dog food with the help of her assistant, Henry. Jillian is in charge of Sales with a team of 12 salesmen in Illinois, Indiana, and Wisconsin. The business is based out of their hometown of Chicago. In an attempt to expand the business, Sarah has applied for a loan of $150,000 with a local bank. Currently, Smackey Dog Food Inc. We will write a custom essay sample on Smackey Dog Foods or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page already has an outstanding loan of $150,000 which is secured by the production equipment that was purchased with the money from the loan. Smackey Dog Food Inc. ’s goal is to secure a second loan that would be secured by the company’s corporate accounts receivable. The bank is requiring a set of audited financial statements before issuing the second loan. Therefore, Smackey Dog Food Inc has contacted my firm, Keller CPAs, to perform the audit. My firm had no prior experience with auditing dog food manufacturers, but we decided to venture out and accept the audit at the end of the year. Assigned to the lead the audit are Pete, Ben and Maureen. Pete is a very experienced auditor that I have worked with on several audits. Ben and Maureen were assigned field auditors to assist myself and Pete. Ben has been with my firm for one year with no prior auditing experience to Keller CPAs. Maureen has 5 years prior experience as an auditor before joining our team. We at Keller CPA have researched and benchmarked the industry to qualify a knowledgeable opinion of our new client, Smackey Dog Food Inc. Discussion Smackey Dog Foods, Inc. is a privately owned company and is not subject to SEC regulations. However, their accounting standards and financial statements must be in conformity with GAAP. During the first stage of the audit, I did research on the dog food industry to better familiarize myself with the risks currently associated with this industry, such as current economic conditions and how they have affected this industry, competition, and the audit procedures that are usually involved in the audit of this type of business. I also developed and presented an engagement letter to Smackey outlining my firm’s fees, the time-line for the audit, and the assistance that will be needed from the staff of Smackey during the audit, and other services that will be performed. Once all the lose ends were tied up with the client, we started performing preliminary analytical procedures which helped us better plan and design the audit and assess risks involving fraud, control, inherent, business and acceptable audit risks. During this process, the following key issues were identified: The Sales Manager, Jillian, is not very familiar with accounting and has started estimating sales in order to get her teams’ sales commissions to them in a more timely manner. These projections are normally off by an average of 11%. The new product line, Best Boy Gourmet, has a short 3 day consumption deadline and, therefore, has a high waste volume. A former employee has a pending lawsuit against the company for wrongful firing. Smackey Dog Food’s largest customer is facing a lawsuit and possible store closures in order to fund the legal fees. They are also unable to pay their invoices within the usual 30 days and Smackey’s accounts receivable are increasing in age. 9% of the company’s accounts receivables are over 61 days old and none have been written off or evaluated for collectibility. There is no formal inventory control system in place and one person, Henry, has full access to the inventory with no checks and balances in place to prevent waste and/or theft. With these issues identified, I knew which areas to focus on while performing tests of controls, substantive tests of transactions, analytical procedures, and test of details of balances. While making observations during field work, Ben and Maureen actually saw an employee take previously thrown away dog food out of a dumpster and place it in Henry’s vehicle. I knew from this incident, that Smackey Dog Foods, Inc had a major weakness in their internal controls with inventory and possibly an outright problem with theft. My team was present at the physical inventory count to help ensure the accuracy of the count and we performed various analytical procedures on he inventory such as comparing the gross margin percentage, the inventory turnover, and unit costs of inventory with those of the previous years. We also ensured that all expired/obsolete inventories was disposed of and not counted as we were aware of an issue that Smackey was having with the handling of returned inventory. In order to confirm the accounts receivable balances, I decided to use positive confirmations since this was my first time auditing the company and the collateral for the loan would be the receivables. The confirmations helped to verify the accuracy and existence of the accounts. I also calculated the Receivables Turnover Ratio in order to better evaluate the overall success of collection on accounts. The sample size that I chose was determined by the factors of tolerable misstatement, inherent risk, control risk, achieved detection risk from other procedures, and the type of confirmation used, negative confirmations require more confirmations. Since such a big emphasis needed to be placed on the Account Receivables and since there was an inherent risk present with the going concern of the major customer, I used a fairly large sample size to conduct my testing. Regarding the pending lawsuit from a former employee, I did research to determine if the employee had a legitimate case by reviewing other lawsuits involving similar circumstances. It is of my opinion that the lawsuit will be unsuccessful, but have disclosed this information in the footnotes of the financial statements. After completing all analytical tests, observing, and making inquiries of the employees of the company, we completed our final report and included all material weaknesses in internal control that may have affected the accuracy of the financial statements. Some recommendations that we made to management were to: Install a warehousing inventory system that will help limit the company’s exposure to waste and theft. Establish a JIT (just-in time) ordering system for raw materials for the Best Boy Gourmet line so that waste will be reduced. Segregate the duties of Henry, the warehouse manager†¦one person should not be in control of both the physical inventory and the accounting for the inventory. Establish criteria for determining a valuation account for A/R and for writing off accounts with an Allowance for Uncollectible Debt. Sales commissions should only be paid when earned and should be based on actual sales figures. Management could further their expertise by enrolling in business, accounting and supervising seminars. Shift duties between the partners so that sales staff are managed by a more hands-on manner and are better monitored for performance. Conclusion In conclusion, it is of the opinion of Keller CPAs that Smackey Dog Foods, Inc. does not have adequate internal controls in place and material misstatements were found in the financial statements due to these internal weaknesses. We do not suspect fraud by management, but have discussed with management the possibility of theft by a certain employee. My firm realizes the responsibility it has to ensure that the bank has accurate financial information when deciding to approve or not approve the second loan to our client. We have taken all steps necessary to identify any misstatements. I have been made aware of some relationships with my staff and employees of the client, but assure that independence was maintained throughout the audit process. We do feel that Smackey Dog Foods, Inc. is a successful company and has great potential if they will implement the changes my firm has suggested. Reference Auditing and Assurance Services: An Integrated Approach, 13th Edition, by Arens, Elder and Beasley.